Inadequate Segment Reporting Costs Energy Company $470,000 Fine

SEC SealThe SEC charged PowerSecure International, Inc., a North Carolina-based energy services company, with violations of the segment reporting rules. The Commission alleged several financial reporting, books and records and internal control violations. PowerSecure, without admitting or denying wrongdoing, consented to the entry of a cease and desist order and agreed to pay a $470,000 civil penalty.

FASB Accounting Standards Codification Topic 280 is the authoritative standard for segment reporting under U.S. GAAP.  The purpose of the standard is to allow users of financial statements to better understand company performance, to better assess its prospects for future net cash flows and to make more informed judgments about the entity as a whole.

ASC 280 does not establish a bright line definition of reportable segments. Rather, the standard uses what it calls a "management approach," where the question of whether a particular company component is a reportable operating segment turns on the manner in which management makes operating decisions and assesses unit performance. The standard utilizes the concept of a Chief Operating Decision Maker (CODM). The CODM determination does not turn on a particular company title. Rather, it refers to the individual responsible for allocating resources to and assessing performance of the segments of the company. In the case of PowerSecure, the CEO served as the CODM.

Under ASC 280, a business component is an operating segment if it has all of the following characteristics:

  • it engages in business activities from which it may earn revenues and incur expenses;
  • is operating results are regularly reviewed by the CODM to make decisions about resources to be allocated to the segment and assess its performance; and
  • its discrete financial information is available.

The SEC found that PowerSecure incorrectly presented its continuing operations as one reportable segment from 2012 to the first quarter of 2014, when it should have identified and reported multiple segments. The company incorrectly concluded that there was no discrete financial information available below the one level that it reported and that the CODM did not regularly review operating results below this level to assess performance and make resource allocations.

The SEC rejected PowerSecure's argument that it did not meet the discrete financial information requirement because the company did not allocate certain operating expenses among its business units with sufficient precision. According to the Commission, the standard only requires there to be a measure of profit or loss available, and the company's use of gross profit was sufficient for this purpose. In addition, the SEC found that the CEO received financial results on a monthly basis that reflected activity on a sufficiently disaggregated level, and met with each business unit leader to discuss operational issues, sales forecasts, and financial performance.

The company also disclosed in its 2015 Form 10-K that its disclosure controls and procedures had not been effective for the previous three years due to a material weakness related to segment reporting. PowerSecure claimed to have remediated the material weakness during 2015.

In the Matter of PowerSecure International, Inc., SEC Release No. 34-79256 (Nov. 7, 2016).